IBM reaches $400M settlement deal with Compuware

IBM Corp. has reached a settlement agreement with software developer Compuware Corp., which sued IBM in 2002 for an alleged litany of violations including copyright infringement, antitrust law abuses and unfair competitive acts. Under the deal’s terms, IBM will spend US$400 million over the next four years on Compuware software and services, the two companies announced Tuesday.

Compuware’s initial complaint in March 2002 charged IBM with using Compuware source code in IBM’s File Manager and Fault Analyzer tools; illegally tying customer purchases of mainframe software tools to purchases of other key IBM software products; steering its services customers to its own products without fair competition; and denying rival vendors necessary technical information on IBM hardware and software. The trial on the case began in February in the District Court for the Eastern District of Michigan, near Compuware’s Detroit headquarters.

Compuware’s allegations set off a web of litigation between the two companies. IBM countersued Compuware in the Michigan court alleging violations of six IBM patents, and followed up in January 2004 with another patent-infringement lawsuit against Compuware, this time in New York’s Southern District Court. Those lawsuits will cease as a result of Tuesday’s deal, which settles all outstanding litigation between the companies. IBM said in a written statement that it does not expect the deal to materially affect its first-quarter 2005 earnings results

Armonk, New York-based IBM will spend $260 million over the next four years on Compuware services, along with an additional $140 million to license Compuware software. IBM and Compuware also entered a patent cross-licensing agreement and will exchange technical information to insure interoperability of their products. Compuware’s product portfolio includes management software for IBM’s mainframes.

An IBM spokesman said the $260 million services component of the deal will not come directly out of IBM’s pocket: IBM will offer Compuware subcontracting deals through IBM Global Services, valued at that amount. The settlement will not alter IBM’s business practices in any way, he said. In a conference call with analysts and media after the agreement was announced, Compuware Chairman and Chief Executive Officer Peter Karmanos said the deal will help both companies and strengthen their relationship.

“This is a great win for everyone but the lawyers,” Karmanos quipped. In fact, he expects a reduction in legal costs to be a significant boon to Compuware, saving the company between $20 million and $40 million per year. The long legal battle has cost Compuware about $95 million, he estimated. Each company paid its own legal fees, according to Karmanos. He does not expect the settlement to affect Compuware’s results for this quarter.

IBM will get an enterprise software license that covers all of Compuware’s products, including mainframe and client/server products, with a guarantee that IBM will buy $140 million worth of software within four years. A joint task force between the companies will determine how IBM will use Compuware products, Karmanos said. He aims to convince IBM to buy more. Karmanos said he did not know whether Compuware products would displace any other software currently in use at IBM.

Compuware, which complained in 2002 that IBM had become stingy with important technical information for ISVs (independent software vendors) after it began competing with them, is now satisfied that it is receiving all the information it should, Karmanos said.

Compuware’s goal is to reach the Premier level in IBM’s PartnerWorld program, he said. For partners at that invitation-only level, IBM provides the highest level of technical, marketing, and sales support, according to IBM’s Web site.

The deal probably won’t fundamentally change the market or reduce pricing pressure, Karmanos said. “We’re still going to compete with them, and that works out well for all our customers,” Karmanos said.